Daniel Loeb, who runs hedge-fund firm Third Point LLC, has raised questions about whether compensation levels at Morgan Stanley are justified given the New York company's size and relative simplicity compared with larger banks, said a person familiar with his thinking.

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Daniel S. Loeb
Reuters

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Mr. Loeb hasn't singled out any executive he thinks is overpaid. But the questions indicate a tougher stance by Third Point than it let on in Wednesday's announcement of the purchase of an unspecified number shares of Morgan Stanley, which it said "is in the early innings of a turnaround."

In a letter to clients last week that was viewed by The Wall Street Journal, Third Point criticized Morgan Stanley's pay for directors, which surpassed J.P. Morgan ChaseJPM-0.74% & Co. and Citigroup Inc.C-0.71% "although Morgan Stanley is a substantially smaller and simpler bank."

Mr. Loeb now is scrutinizing pay practices at Morgan Stanley more widely, including the compensation of Chairman and Chief Executive James Gorman. In 2010 and 2011, executives whose pay is disclosed in proxy filings by the company received a total of $130.1 million, up from $50.1 million in 2008 and 2009, when many took little or no bonus because of the financial crisis.

Morgan Stanley is expected to disclose later this month the stock-based compensation for its top officers. Many employees will learn this week the size of their 2012 bonuses, and some overall details are expected when it reports fourth-quarter results Friday. Payouts are likely to fall from a year ago, people familiar with the firm said.

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Mr. Loeb has indicated to people close to him that in some cases he feels the pay is appropriate, given the tricky balancing act needed to hold on to talented employees and placate restive shareholders while Mr. Gorman tries to rejuvenate the company.

Last week, Third Point said Morgan Stanley shares "should nearly double" if Mr. Gorman continues to build up the brokerage business and works on a "bold fix" for "struggling" bond-trading businesses. On Monday, Morgan Stanley shares slipped 10 cents to $20.07 in New York Stock Exchange composite trading at 4 p.m. The stock price peaked near $90 in 2000.

A Morgan Stanley spokeswoman said that Mr. Gorman "reached out to Mr. Loeb and welcomed him as a new investor and said he was pleased that Mr. Loeb shared his view on the future upside performance of Morgan Stanley and its stock."

Mr. Loeb, chief executive of Third Point, which manages about $10 billion in assets, concluded that Ruth Porat, a former investment banker who became Morgan Stanley's finance chief in 2010, is fairly compensated, according to a person familiar with his thinking. Last year, she was awarded an $8.75 million package of cash, shares and other deferred compensation, ranking fourth among the chief financial officers at six big U.S. banks. The fund manager made his decision about Ms. Porat's pay after speaking to people who know her well, this person added.

Morgan Stanley is smaller than many of its fiercest rivals in trading, investment banking and pitching stocks and bonds to investors, yet it still has a complex balance sheet and substantial operations in risky markets such as derivatives and commodities. Since taking the top job in 2010, Mr. Gorman has been trying to build up relatively stable businesses such as retail brokerage, while turning around struggling units like bond trading.

"If we did not believe Morgan Stanley's management was up to these important tasks, we would not own such a significant position," Mr. Loeb's firm told clients last week in its letter.

One potential source of friction likely will be resolved when Morgan Stanley director Roy Bostock, 72 years old, retires this spring.

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Last week's letter criticized Mr. Bostock, a former Yahoo Inc.YHOO-2.00% chairman, without identifying him by name. Mr. Loeb clashed with Mr. Bostock until the hedge-fund manager muscled his way onto Yahoo's board as part of a Third Point-led shake-up. Mr. Bostock couldn't be reached Monday for comment.

In investment banking, some critics have called on Morgan Stanley to lower compensation for Michael Grimes, the star technology banker who helped take Facebook Inc.FB-1.26% public last May. Mr. Grimes's pay in 2011 was an estimated $6 million.

Facebook stock is down nearly 20% since then, and Morgan Stanley last month agreed to pay $5 million to settle allegations from Massachusetts regulators that Mr. Grimes tried to improperly influence research analysts before the initial public offering. The firm didn't admit or deny the allegations.

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